February 2015

Nov 09, 2011

Austerity as a response to the recent rise in Italy’s borrowing costs is therefore exactly the wrong policy prescription...the only way to break out of the remorseless spiral of contagion is to take radical steps to fundamentally change market expectations about Italy’s debt market.

The European Central Bank is the only institution that has such power right now...

And given the ECB's crackerjack job to date...excuse me while I curl up under my desk for a while.

George, are you saying that the 2008 commodity price surge was the result of the ECB "printing money"? If so, I disagree and would point instead to rising commodity demand in BRIC countries. Monetary policy, whether by the Fed or the ECB, has had little or nothing to do with recent commodity price movements.

But I agree with what I take to be your characterization of Italy's vicious circle. Its rising borrowing costs are unrelated to its fiscal position per se, but at this point the process starts looking like a bank run.

2008 Commodity surge was from ultra low interest rates and easily available consumer debt and supply and demand. 2009 and and 10a was from fed and printing and china stimulus etc... now, hopefully prices fall to non leveraged more normalized levels

You're obviously welcome to hate the Fed, but you can't blame commodity prices on the Fed's actions. It's Econ 101: cost-push inflation. If it had been the Fed, then (a) we would have seen it in wages, not just commodity prices, and (b) the commodity-price surge wouldn't have petered out and in some respects reversed itself.

I agree that the Italy thing is going to get ugly. But not because of commodity prices.

The metrics in your econ book are wrong. They pumped money into the system to get more borrowing going, which didn't happen, so the money borrowed short term went into financial markets, which is where commodities etc... are traded.

I did that. The growth in the world economy right now is in the developing and emerging economies, and it's that growth, not the Fed, that's been pushing commodity prices around. In normal times, the Fed's expanded balance sheet would have indeed caused inflation (though it'd be a general inflation, not just in commodity prices). But these aren't normal times. The Fed's actions have been offset by low velocity of money, which is just a fancy way of saying that people aren't spending much and hence money is circulating very slowly.